Yellen Can Do It All, Unfortunately She Has To

There aren’t enough superlatives to describe the importance of President Barack Obama’s decision to nominate Janet Yellen as chairman of the Federal Reserve.

Unfortunately, that’s mostly because the job has become far too powerful and influential — a default government for economic policy instead of its true job as manager of monetary policy.

No wonder that the role of Fed chairman is being described as “the world’s most powerful economic policy maker.”

U.S. Sen. Sherrod Brown, (D., Ohio), who lobbied for Ms. Yellen, hinted at this enormous responsibility in his statement praising the move on Wednesday.

“Gov. Yellen will work to prevent future bailouts, boost our housing markets, and give the Fed’s mandate to maximize employment the attention it deserves,” he said in a statement.

Sen. Brown is gushing a little bit, and critics might dispute the policies he’s advocating. But few would argue that since the financial crisis, the Fed has been a prime mover in all of the areas on which the senator touched.

That’s not to say tackling these issues isn’t at all the Fed’s responsibility. But a couple of them – housing and bailouts – are not its primary responsibility. If confirmed, Ms. Yellen, like outgoing Chairman Ben Bernanke, would be liable for an obligation abdicated by a failed Congress and a too-soft, often-defensive administration. Ms. Yellen would be responsible for all that – and a balance sheet that has quadrupled to more than $3.8 trillion.

The Federal Reserve Act of 1913 clearly spells out the Fed’s objectives. The Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Even with its broad terms, it’s a fairly narrow definition. The Fed’s role is limited. So why is it buying $85 billion a month in bonds?

The answer is that we have come to rely on the Fed in the absence of a proactive legislative branch and leadership from the executive branch. After the Democrats lost the U.S. House of Representatives in 2010, not only were stimulus packages and work programs off the table, the opposite approach, cutting spending, became the order of the day.

Since the financial crisis we’ve had one spending bill specifically aimed at the recovery. The $787 billion American Recovery and Reinvestment Act passed in 2009. That’s it.

Since then we’ve had a federal budget sequestration ($85.4 billion a year, increasing to an average of $238.6 billion annually during the next decade). Federal spending has fallen since those 2010 elections even though tax revenue is rising. Last year, the federal deficit as a share of gross domestic product fell to 7% from 8.7% the year before, according to the Congressional Budget Office.

That’s not just Washington doing nothing, it’s a government creating policies that get less money into the economy, not more.

Now, contrast that “effort” with the Congresses of the Great Depression: the Public Works Administration (1933), the Rural Electrification Administration (1935), the Civilian Conservation Corps (1933), the Tennessee Valley Authority (1933) not to mention stronger regulation and public safety nets in the Federal Deposit Insurance Corp. (1933) and Social Security Act (1935).

Ironically, the big drag on these programs’ effect on the economy wasn’t their execution. It was a blundering Federal Reserve that squeezed the money supply just as the economy was showing signs of recovery.

These programs also offered two benefits: a) they made lawmakers who brought home the bacon popular and b) elected officials controlled where taxpayer money would go.

The latest approval ratings: President Obama, 44%. Congress, 11%, according to Gallup.

And the Fed’s approval rating? The closest we come to that measure is the stock market. The S&P 500 Index is up 15% during the last year, 51% in the last five years, roughly when the Fed began implementing its policies in the depths of the financial crisis

Inflation is low. The job market is lagging, but improving. The housing market has stabilized. But it’s only going to get tougher as the Fed unwinds the balance sheet.

So, good luck to Ms. Yellen. She’s been tapped for a big job. Too big.